We are told Sunday’s independence referendum in Catalonia could cause a constitutional crisis in Spain and would put Eurozone breakup risk back on the agenda of investors, with negative long-term implications for the Euro.
The wealthy province of Catalonia will hold an independence referendum on Sunday, 01 October, despite it having been deemed illegal by Spain’s constitutional court.
“We view the long-term viability of the euro as hinged on EU fiscal integration,” says Jasper Lawler, head of research at London Capital Group. “If Catalonia votes for independence, it puts break-up risk back on the agenda for investors in Europe.”
The vote comes one week after the German federal election propelled an anti-establishment, and anti-Euro, party into public office in the economic heart of the Eurozone.
It also comes ahead of May 2018 elections in Italy, where anti-Euro and anti-establishment forces are polling strongly.
“With the regional government saying it will go ahead with the vote on Sunday, despite Spanish courts having ruled it to be illegal, the risk is that this turns into a constitutional crisis of some kind,” says Simon Derrick, chief currency strategist at BNY Mellon.
The Spanish government has attempted to scupper the vote by confiscating millions of ballot papers and seizing equipment from polling stations. Spanish authorities have also arrested and held a number of Catalan politicians, academics and pro-independence activists.
“The Catalan government remains defiant and people have taken to the streets to demonstrate in favour of the regional government,” says Bruce Kasman and his economic research team at JPMorgan.
Spain has deployed its military police, the Guardia Civil, to Catalonia and there is expected to be a heavy police presence at polling stations throughout Sunday.
"It's just shocking to see that nobody's reacting here," says Mark Demesmarker, Member of the European Parliament. pic.twitter.com/Ysfpvptl0t— Catalan News (@catalannews) September 27, 2017
“If the Catalonia referendum goes ahead we expect this to be a disruptive event for the Euro, with the potential for a sharp decline of up to 5% initially in the single currency if the separatists win,” says Kathleen Brooks, research director at City Index.
An earlier 2014 campaign for independence by Catalonia was hampered by low turnout and similarly ruled as illegal by Spain’s constitutional court. The region’s most recent push for independence however, dates back to 2012 and the depths of the Eurozone debt crisis.
“What seems clear to us is that a unilateral declaration of independence by the Catalan government is not a viable option,” says Kasman and his team. “Doing so would take Catalonia outside the EU and Euro area with all the economic damage that such a move would entail.”
But the push for independence in Catalonia is much more than a modern, debt-crisis-induced phenomenon. As a province, Catalonia has its own language (Catalan) and enjoys a rich cultural history.
“Another result [of the referendum] could be that investors turn back to considering the possible outcome of the Italian general election that must be held no later than May 2018,” says BNY’s Derrick.
The evolution of Catalonia’s constitutional position is long and complex, spanning hundreds of years, and has included periods of existence as a republic in its own right and as an autonomous region of the Spanish state.
Occupying a vast region of Northern Spain, Catalonia is an economic nerve centre of the Spanish state with some 7.5 million inhabitants. It also plays host to the economic powerhouse and cultural centre of Barcelona.
Catalonia was also ruled directly by Madrid throughout much of the 1900’s after being seized during the Spanish civil war, an event which ushered in decades of fascist dictatorship for all of Spain.
“It would make sense for the EUR to weaken if concerns about the rise of populism in the Eurozone re-emerged,” adds BNY's Derick.
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